UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-16946
LAB HOLDINGS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1039532
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 7568
5000 W. 95th Street, Suite 260
Shawnee Mission, KS 66207
-------------------------------- ----------------
(Address of principal (Zipcode)
executive offices)
Registrant's telephone number, including area code (913) 648-3600
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- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Number of shares outstanding of only class of Registrant's common stock as of
August 11, 1998: $1 par value common - 6,489,103
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
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(unaudited)
June 30, December 31,
1998 1997
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(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 15,910 22,129
Short-term investments 1,876 2,648
Accounts and notes receivable 15,684 12,608
Current income taxes 1,545 1,400
Inventories 1,629 2,203
Real estate available for sale 3,515 3,515
Prepaid expenses and other current assets 2,410 2,459
Deferred income taxes 3,682 3,386
----------------------
Total current assets 46,251 50,348
Property, plant and equipment 15,093 10,441
Intangible assets 11,855 13,058
Deferred income taxes 606 858
Other assets 24 81
----------------------
$ 73,829 74,786
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,075 3,367
Accrued payroll and benefits 3,949 4,530
Other accrued expenses 398 423
Other current liabilities 194 303
----------------------
Total liabilities 8,616 8,623
----------------------
Minority interests 9,562 9,476
----------------------
Stockholders' equity:
Preferred stock of $1 par value.
Authorized 3,000,000 shares; none issued -- --
Common stock of $1 par value.
Authorized 24,000,000 shares;
issued 7,500,000 shares 7,500 7,500
Paid-in capital 1,772 1,772
Retained earnings 77,118 78,103
Accumulated other comprehensive income (loss) (595) (544)
----------------------
85,795 86,831
Less cost of 1,010,897 shares of treasury stock 30,144 30,144
----------------------
Total stockholders' equity 55,651 56,687
----------------------
$ 73,829 74,786
======================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations.
LAB HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------
(in thousands except share amounts)
Sales $ 25,763 20,308 49,096 38,048
Cost of sales 13,832 10,636 26,791 20,086
--------------------- ---------------------
Gross profit 11,931 9,672 22,305 17,962
Selling, general and
administrative 8,424 10,736 16,283 19,182
--------------------- ---------------------
Earnings (loss) from
operations 3,507 (1,064) 6,022 (1,220)
Investment income - net 289 395 656 4,200
Other income (expense) (25) (28) (26) 84
--------------------- ---------------------
Earnings (loss) before
income taxes 3,771 (697) 6,652 3,064
Income taxes 1,607 3,259 2,911 9,573
--------------------- ---------------------
Earnings (loss) before
minority interests 2,164 (3,956) 3,741 (6,509)
Minority interests 464 330 833 598
--------------------- ---------------------
Earnings (loss) from continuing
operations 1,700 (4,286) 2,908 (7,107)
Loss from discontinued
healthcare business -- (2,946) -- (2,342)
--------------------- ---------------------
Net earnings (loss) $ 1,700 (7,232) 2,908 (9,449)
===================== =====================
Basic earnings (loss) per share:
Earnings (loss) from
continuing operations $ .26 (.66) .45 (1.10)
Loss from discontinued
healthcare business -- (.45) -- (.36)
--------------------- ---------------------
Net earnings (loss) $ .26 (1.11) .45 (1.46)
===================== =====================
Diluted earnings (loss) per share:
Earnings (loss) from
continuing operations $ .26 (.66) .44 (1.10)
Loss from discontinued
healthcare business -- (.45) -- (.36)
--------------------- ---------------------
Net earnings (loss) $ .26 (1.11) .44 (1.46)
===================== =====================
Dividends $ .30 .30 .60 .60
Book value $ 8.58 17.36 8.58 17.36
Weighted average shares
outstanding 6,489,103 6,489,103 6,489,103 6,488,176
Shares outstanding
end of period 6,489,103 6,489,103 6,489,103 6,489,103
See accompanying notes to consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Six Months Ended June 30, 1998 (unaudited)
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Comprehensive Stockholders'
Income Equity
- ---------------------------------------------------------------------------
(in thousands)
Common stock:
Balance, beginning and end of period $ 7,500
--------
Paid-in capital:
Balance, beginning and end of period 1,772
--------
Retained earnings:
Balance, beginning of year 78,103
Net earnings 2,908 2,908
Cash dividends paid -------- (3,893)
--------
Balance, end of period 77,118
--------
Accumulated other comprehensive income (loss)
Balance, beginning of year (544)
Foreign currency translation (51)
Tax expense -
--------
(51) (51)
-------- --------
Balance, end of period (595)
--------
Less:
Treasury stock:
Balance, beginning and end of period 30,144
--------
Totals $ 2,857 55,651
======== ========
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations.
LAB HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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(unaudited)
Six Months Ended
June 31,
1998 1997
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(In thousands)
OPERATING ACTIVITIES
Earnings (loss) from continuing operations $ 2,908 (7,107)
Adjustments to reconcile earnings(loss)
from continuing operations to net cash
provided by continuing operations:
Depreciation and amortization 2,828 2,954
Earnings applicable to minority interests 833 598
Change in trading portfolio, net 69 34,490
Change in accounts receivable (3,076) (3,746)
Change in accounts payable 708 36
Income taxes and other, net (214) 6,523
-------------------
Net cash provided by continuing
operations 4,056 33,748
Net cash used by discontinued
healthcare business -- (1,006)
Net cash provided by discontinued
real estate operations -- 581
-------------------
Total cash provided by operations 4,056 33,323
-------------------
INVESTING ACTIVITIES
Sales of investments available for sale -- 1,350
Purchases of investments held to maturity (5,461) (10,190)
Maturities of investments held to maturity 6,202 5,232
Additions to property, plant
and equipment, net (6,319) (2,391)
Acquisition of assets -- (4,128)
Other, net (748) (623)
-------------------
Net cash used by investing activities (6,326) (10,750)
-------------------
FINANCING ACTIVITIES
Regular quarterly dividends paid (3,893) (3,893)
Cash portion of SLH dividend -- (19,590)
Net issuance of treasury stock pursuant to
stock option plans -- (7)
-------------------
Net cash used by financing activities (3,893) (23,490)
-------------------
Effect of foreign currency translation (56) (19)
-------------------
Net decrease in cash and cash equivalents (6,219) (936)
Cash and cash equivalents at
beginning of period 22,129 4,957
-------------------
Cash and cash equivalents at end of period $ 15,910 4,021
===================
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ -- --
===================
Income taxes, net $ 3,059 1,417
===================
Supplemental disclosures of non-cash information:
SLH dividend $ -- 28,373
===================
See accompanying notes to consolidated financial statements and
management's discussion and analysis of financial condition and
results of operations.
LAB HOLDINGS, INC.
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(1) The interim financial information furnished herein is unaudited while
the balance sheet at December 31, 1997 is derived from audited financial
statements. In the opinion of management, the financial information
reflects all adjustments which are necessary to fairly state Lab Holdings'
financial position at June 30, 1998 and December 31, 1997 and the results
of its operations and cash flows for the periods ended June 30, 1998 and
1997. All adjustments made in the interim period were of a normal
recurring nature. The financial statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances, and therefore included in the financial statements are
certain amounts based on management's informed estimates and judgments.
The financial information herein is not necessarily representative of a
full year's operations because levels of sales, interest rates and other
factors fluctuate throughout the fiscal year. These same considerations
apply to all year to year comparisons. Certain 1997 amounts have been
reclassified for comparative purposes with no effect on net earnings
(loss). See Lab Holdings' Annual Report pursuant to Section 13 to the
Securities Exchange Act of 1934 (Form 10-K as amended) for additional
information not required by this Quarterly Report on Form 10-Q.
(2) On March 3, 1997, Lab Holdings distributed to its shareholders all of
the outstanding shares of common stock of its wholly-owned subsidiary, SLH
Corporation (SLH). For each shareholder of record on February 24, 1997,
one share of SLH common stock was distributed for each four shares of Lab
Holdings common stock owned. In connection with this distribution and
pursuant to a Distribution Agreement between Lab Holdings and SLH, Lab
Holdings transferred its real estate and energy businesses and
miscellaneous assets and liabilities, including two wholly-owned
subsidiaries, Scout Development Corporation and BMA Resources, Inc., to
SLH. The net assets distributed to SLH totaled approximately $48 million.
The spinoff was accounted for as a dividend. The Lab Holdings shareholders
paid no consideration for any shares of SLH stock received in the
distribution.
(3) On July 25, 1997, Lab Holdings distributed to its shareholders all of
the shares of common stock of Response Oncology, Inc. (Response) owned by
Lab Holdings. For each shareholder of record on July 11, 1997, 1.2447625
shares of Response common stock were distributed for each share of Lab
Holdings common stock outstanding. The distribution of all shares of
Response stock to Lab Holdings' shareholders was effected as a dividend.
The Lab Holdings shareholders paid no consideration for any shares of
Response stock received in the distribution.
Lab Holdings' share of Response's earnings are shown as a discontinued
business in the accompanying financial statements.
As a result of the SLH and Response distributions, Lab Holdings' principal
asset consists of its approximate 82% ownership of LabOne, Inc. (LabOne).
(4) Cash and cash equivalents include demand deposits in banks, money
market investments and overnight investments that are stated at cost, which
approximates market value.
(5) Basic earnings per share is computed using the weighted average number
of common shares and diluted earnings per share is computed using the
weighted average number of common shares and dilutive stock options.
Earnings available to common shareholders was adjusted to reflect the
Company's share of LabOne's earnings based on a diluted ownership after
taking into account LabOne's common stock equivalents. The following table
reconciles net earnings and weighted average shares used to compute basic
and diluted earnings per share.
June 30, 1998
-----------------------------------
Earnings from
Continuing Per Share
Operations Shares Amount
-----------------------------------
Basic earnings per share $ 2,908,000 6,489,103 $ .45
Effect of dilutive securities:
Lab Holdings stock options -- --
LabOne stock options (52,000) --
-----------------------------------
Dilutive earnings per share $ 2,856,000 6,489,103 $ .44
===================================
June 30, 1997
-----------------------------------
Loss from
Continuing Per Share
Operations Shares Amount
-----------------------------------
Basic loss per share $(9,449,000) 6,488,176 $ (1.46)
Effect of dilutive securities:
Lab Holdings stock options -- --
LabOne stock options -- --
-----------------------------------
Dilutive loss per share $(9,449,000) 6,488,176 $ (1.46)
===================================
Computation of dilutive loss per share at June 30, 1997 did not include the
effect of stock options because to do so would have been antidilutive.
(6) LabOne operates in three lines of business: insurance risk appraisal
testing, clinical diagnostic testing and substance abuse testing. The
following table presents the Company's selected financial information for
each segment.
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------------ ------------------
(in thousands)
Sales
Insurance risk
appraisal testing $ 17,572 15,897 34,394 30,326
Clinical diagnostic testing 4,723 2,120 8,377 3,661
Substance abuse testing 3,468 2,291 6,325 4,061
------------------- -------------------
Total sales $ 25,763 20,308 49,096 38,048
=================== ===================
Operating Income (Loss)
Insurance risk
appraisal testing $ 5,573 4,735 10,786 9,046
Clinical diagnostic testing (1,509) (1,895) (3,444) (3,999)
Substance abuse testing 40 (198) (139) (507)
General corporate expense (597) (3,706) (1,181) (5,760)
------------------- -------------------
Earnings (loss)
from operations 3,507 (1,064) 6,022 (1,220)
Investment income - net 289 395 656 4,200
Other income (expense) (25) (28) (26) 84
------------------- -------------------
Earnings (loss) before
income taxes $ 3,771 (697) 6,652 3,064
=================== ===================
There were no material changes in asset levels by segment or in the basis
of segmentation or measurement of segment operating income or loss.
(7) The Company adopted the provisions of the Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" on January
1, 1998. Comprehensive income is defined as any change in equity from
transactions and other events originating from non-owner sources. For Lab
Holdings, those changes are composed of reported net income and changes in
unrealized foreign currency translation adjustments. The components of
comprehensive income are as follows.
June 30,
1998 1997
------------------
(in thousands)
Net earnings (loss) $ 2,908 (9,449)
------------------
Other comprehensive income
Foreign currency translation (51) (37)
Tax expense -- --
------------------
Total other comprehensive income (51) (37)
------------------
Total Comprehensive Income $ 2,857 (9,486)
==================
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Selected Financial Data
Three months ended Six months ended
June 30, June 30,
---------------------- --------------------
1998 1997 1998 1997
---------- ---------- --------- -------
Sales $25,763,000 20,308,000 49,096,000 38,048,000
Earnings (Loss) from
operations $ 3,507,000 (1,064,000) 6,022,000 (1,220,000)
Investment income - net $ 289,000 395,000 656,000 4,200,000
Earnings (Loss) from
continuing operations $ 1,700,000 (4,286,000) 2,908,000 (7,107,000)
Loss from discontinued
healthcare business $ -- (2,946,000) -- (2,342,000)
Net earnings (loss) $ 1,700,000 (7,232,000) 2,908,000 (9,449,000)
Basic earnings per share:
Earnings (loss) from
continuing operations $ .26 (.66) .45 (1.10)
Loss from discontinued
healthcare business -- (.45) -- (.36)
Net earnings (loss) $ .26 (1.11) .45 (1.46)
Dividends per share $ .30 .30 .60 .60
Book value per share $ 8.58 17.36 8.58 17.36
Introductory remarks about results of operations
Lab Holdings, Inc.'s (Lab Holdings or Registrant) principal assets consist
of a majority ownership of LabOne, Inc. (LabOne) and approximately $5.1
million in cash and short-term investments. Prior to October 20, 1997, Lab
Holdings was named Seafield Capital Corporation (Seafield). Seafield
changed its name to Lab Holdings for better identification with its primary
asset, the approximate 82% ownership of LabOne.
Lab Holdings had a majority ownership position in Response Oncology, Inc.
(Response). On July 25, 1997, Lab Holdings distributed to its shareholders
all the shares of common stock of Response owned by Lab Holdings. The
distribution of Response stock was effected as a taxable dividend by Lab
Holdings. Response's 1997 operations are presented as a discontinued
healthcare business in Lab Holdings' financial statements.
Response, previously 67%-owned by Lab Holdings, is a publicly-traded
company (NASDAQ-ROIX). On February 26, 1997, Lab Holdings converted a
$23.5 million Response note receivable and accrued interest into 3,020,536
shares of Response common stock. The conversion increased Lab Holdings'
ownership of Response shares outstanding from 56% at December 31, 1996 to
approximately 67%.
Additionally, Lab Holdings had investments in real estate, energy
businesses and miscellaneous assets. On March 3, 1997, Lab Holdings
distributed to its shareholders all of the outstanding shares of common
stock of its wholly-owned subsidiary, SLH Corporation (SLH). In connection
with this distribution and pursuant to a Distribution Agreement between Lab
Holdings and SLH, Lab Holdings transferred its real estate and energy
businesses and miscellaneous assets and liabilities to SLH. The SLH spin-
off was accounted for as a dividend.
LabOne provides high-quality laboratory services to insurance companies,
physicians and employers.
LabOne provides risk-appraisal laboratory services to the insurance
industry. The tests performed are specifically designed to assist an
insurance company in objectively evaluating the mortality and morbidity
risks posed by policy applicants. The majority of the testing is performed
on specimens of individual life insurance policy applicants. LabOne also
provides testing services on specimens of individuals applying for
individual and group medical and disability policies.
LabOne's clinical testing services are provided to the healthcare industry
to aid in the diagnosis and treatment of patients. LabOne operates only
one highly automated and centralized laboratory, which LabOne believes has
significant economic advantages over other conventional laboratory
competitors. LabOne markets its clinical testing services to the payers of
healthcare--insurance companies and self-insured groups. LabOne does this
through Lab Card(trademark), a Laboratory Benefits Management (LBM)
program.
The Lab Card Program provides laboratory testing at reduced rates as
compared to traditional laboratories. It uses a unique benefit design that
shares the cost savings with the patient, creating an incentive for the
patient to help direct laboratory work to LabOne. Under the Program, the
patient incurs no out-of-pocket expense when the Lab Card is used, and the
insurance company or self-insured group receives substantial savings on its
laboratory charges.
Additionally, BlueCross BlueShield of Tennessee selected LabOne to provide
routine outpatient laboratory testing services for BlueCare members
throughout Tennessee effective February 1, 1998. BlueCare is BlueCross
BlueShield of Tennessee's plan for Tenncare participants and covers
approximately 350,000 members. LabOne's LBM programs, including BlueCare
and the Lab Card program, have approximately 2 million lives enrolled.
LabOne is certified by the Substance Abuse and Mental Health Services
Administration (SAMHSA) to perform substance abuse testing services for
federally regulated employers and is currently marketing these services
throughout the country to both regulated and nonregulated employers. The
Company's rapid turnaround times and multiple testing options help clients
reduce downtime for affected employees and meet mandated drug screening
guidelines.
SECOND QUARTER ANALYSIS
Revenues increased 27% to $25.8 million in the second quarter 1998 from
$20.3 million in the second quarter 1997 due to increases in all business
segments. Insurance segment revenue increased to $17.6 million during the
second quarter 1998 as compared to $15.9 million in the same quarter last
year. The increase was due to an increase in market share and an increase
in oral fluid testing on applicants applying for smaller face-amount
policies. The total number of insurance applicants tested in the second
quarter 1998 increased by 13% as compared to the same quarter last year.
Average revenue per applicant decreased 4% during the same periods due to
competitive pricing pressures. Insurance kit and container revenue
increased, due primarily to an increase in the number of blood and oral
fluid kits sold.
Clinical (diagnostic) laboratory revenue increased 123% from $2.1 million
in the second quarter 1997 to $4.7 million in 1998 due to a 94% increase in
testing volumes and a 15% increase in the average revenue per patient.
Substance abuse testing (SAT) revenue increased 51% from $2.3 million in
the second quarter 1997 to $3.5 million in 1998 primarily due to increased
testing volumes.
Cost of sales increased $3.2 million in the second quarter 1998 as compared
to the prior year, due primarily to increases in supplies, inbound freight
and outside laboratory testing and collection services. Laboratory
supplies increased due to the increased specimen volumes tested in each
segment. Insurance kit supplies increased due to the higher volume of kits
sold. Inbound freight and outside laboratory testing and collection
services increased primarily due to the increased specimen volumes in the
clinical and SAT segments. Clinical cost of sales expenses were $3.6
million as compared to $2.1 million in the second quarter 1997. SAT cost
of sales expenses were $2.3 million as compared to $1.7 million in the
second quarter 1997.
As a result of the above factors, gross profit for the quarter increased
$2.3 million (23%) from $9.7 million in the second quarter 1997 to $11.9
million in the second quarter 1998. Clinical gross profit increased to
$1.1 million in the second quarter 1998 from $39,000 in the second quarter
1997. SAT gross profit increased to $1.1 million in the second quarter
1998 from $600,000 in the second quarter 1997.
LabOne's selling, general and administrative expenses increased $800,000
(11%) in the second quarter 1998 as compared to the prior year, due
primarily to increases in payroll expenses and bad debt accruals. These
were partially offset by a decrease in depreciation expenses. Clinical
expenses, including allocated overhead, were $2.6 million as compared to
$1.9 million in 1997. SAT expenditures, including allocations, were $1.1
million as compared to $700,000 last year. The overhead allocation to the
clinical and SAT testing segments for the second quarter 1998 was $1.3
million as compared to an allocation of $800,000 in 1997.
Lab Holding's selling, general and administrative expenses decreased to
$191,000 in the second quarter 1998 from $3.3 million in the second quarter
of 1997 as Lab Holding's significantly reduced its corporate structure
after the SLH and Response distributions. Goodwill amortization of
$368,000 associated with Lab Holdings' investment in LabOne was included in
the second quarter operating results of both 1998 and 1997.
Consolidated earnings from operations increased to $3.5 million in 1998's
second quarter from a loss of $1.1 million in the second quarter of 1997
reflecting both Lab Holdings reduction in corporate structure expenses and
improvements in LabOne's operating results. LabOne's insurance segment
operating income increased $800,000. The clinical segment improved
$400,000 to an operating loss of $1.5 million. The SAT segment improved
$200,000 from an operating loss of approximately $200,000 in the second
quarter 1997 to an operating gain of $40,000 in 1998.
Other investments contributing earnings include venture capital and
liquidity investments. The return on short-term investments is included in
the investment income line in the consolidated statements of operations.
Investment income decreased to $289,000 in 1998's second quarter from
$395,000 in 1997's second quarter, which primarily reflected less funds
available for investment. Miscellaneous items produced a $25,000 loss in
1998's second quarter as compared to a loss of $28,000 in 1997's second
quarter.
Tax expense decreased to $1.6 million in 1998's second quarter from $3.3
million in 1997's second quarter. During 1997's second quarter,
approximately $3.2 million of unused deferred income tax assets not
utilized in the Response distribution were written off.
The combined effect of the above factors resulted in the second quarter
1998 earnings from continuing operations of $1.7 million, compared with a
loss from continuing operations of $4.3 million in the second quarter 1997.
Discontinued Healthcare Business:
On July 25, 1997, Lab Holdings distributed to its shareholders all the
shares of common stock of Response owned by Lab Holdings. Response's
operations are presented as a discontinued healthcare business in Lab
Holdings' financial statements. The second quarter of 1997 was the last
period in which Response significantly impacted Lab Holdings' financial
results. The distribution of Response stock was effected as a taxable
dividend by Lab Holdings in which Lab Holdings utilized tax loss
carryforwards to offset a resulting tax liability in the financial
statements. The second quarter 1997 loss of $2.9 million from
discontinued healthcare operations reflected a $3.8 million non-cash tax
expense net of $878,000 for Lab Holdings' share of earnings by Response
during the quarter. For the second quarter of 1997, Response's revenues
were $25.6 million and net earnings totaled $1.2 million.
YEAR-TO-DATE ANALYSIS
Revenue in the six month period ended June 30, 1998 was $49.1 million as
compared to $38 million in the same period last year. The increase of
approximately $11 million is due to increases in clinical laboratory
revenue of $4.7 million, insurance laboratory revenue of $2.8 million, SAT
revenue of $2.3 million and kit revenue of $1.3 million.
The total number of insurance applicants tested in the six month period
increased by 15% as compared to last year, while average revenue per
applicant declined 3%. Kit and container revenue increased $1.3 million
due primarily to an increase in the number of full blood and oral fluid
kits sold.
Clinical laboratory revenue increased from $3.7 million during the first
six months of 1997 to $8.4 million for the same period in 1998 due to
increased testing volumes and higher revenue per patient. SAT revenue
increased from $4.1 million in 1997 to $6.3 million in 1998 due to a 55%
increase in testing volumes.
Cost of sales increased $6.7 million year to date as compared to the prior
year. This increase is due primarily to increases in laboratory and kit
supplies, payroll expenses, inbound freight and outside laboratory
services. Lab supplies increased 27% due to the larger volume of all
specimen types processed, and insurance kit expense increased due to the
higher volume of kits sold. Payroll increased 16%. Freight and outside
testing increased primarily due to the substantial growth in clinical and
SAT specimen volumes. Clinical cost of sales expenses were $7 million as
compared to $4 million during the first six months of 1997. SAT cost of
sales expenses were $4.4 million as compared to $3.1 million during 1997.
As a result of the above factors, gross profit for the first six months
increased from $18 million in 1997 to $22.3 million in 1998. Clinical
gross profit improved from a loss of $300,000 in 1997 to a gain of $1.4
million in 1998. SAT gross profit increased to $1.9 million in the first
six months of 1998 from $900,000 last year.
LabOne's selling, general and administrative expenses increased $1.8
million (13%) in the six month period ended June 30, 1998 as compared to
the prior year due primarily to increases in payroll expenses and bad debt
accruals. Payroll expense increased primarily due to a 13% increase in
headcount and increased benefit expenses. These were partially offset by a
decrease in depreciation expense. Clinical expenditures were $4.9 million
as compared to $3.7 million in 1997. SAT expenses increased from $1.5
million in 1997 to $2.1 million in 1998. The overhead allocation to the
clinical and SAT segments for the period was $2.4 million as compared to an
allocation of $1.5 million in 1997.
Lab Holding's selling, general and administrative expenses decreased to
$372,000 in the first six months of 1998 from $5.1 million in the first six
months of 1997 as Lab Holding's significantly reduced its corporate
structure after the SLH and Response distributions. Goodwill amortization
of $736,000 associated with Lab Holdings' investment in LabOne was included
in the first six months operating results of both 1998 and 1997.
Consolidated earnings from operations increased to $6 million in 1998's
first six months from a loss of $1.2 million in the first six months of
1997 reflecting both Lab Holdings reduction in corporate structure expenses
and improvements in LabOne's operating results. LabOne's operating income
increased from $4.5 million in the first six months of 1997 to $7.1 million
in 1998, primarily due to an increase in the insurance segment operating
income of $1.7 million. The clinical segment had an operating loss of $3.4
million for the six month period ended June 30, 1998 as compared to an
operating loss of $4.0 million in 1997. The SAT segment improved from an
operating loss of $500,000 in 1997 to a loss of $100,000 in 1998.
Other investments contributing earnings include venture capital and
liquidity investments. The return on short-term investments is included in
the investment income line in the consolidated statements of operations.
Investment income decreased to $656,000 in 1998's first six months from
$4.2 million in 1997's first six months, which primarily reflected a $3
million gain by Lab Holdings on the sale of marketable common stock.
Tax expense decreased to $2.9 million in 1998's first six months from $9.6
million in 1997's first six months. During 1997's first six months, tax
expense included the write off of approximately $5 million of the deferred
income tax assets related to assets spun off in the SLH distribution and
the write off of approximately $3.2 million of unused deferred income tax
assets not utilized in the Response distribution.
The combined effect of the above factors resulted in earnings from
continuing operations of $2.9 million for the first six months of 1998 ,
compared with a loss from continuing operations of $7.1 million in the
first six months of 1997.
Discontinued Healthcare Business:
On July 25, 1997, Lab Holdings distributed to its shareholders all the
shares of common stock of Response owned by Lab Holdings. Response's
operations are presented as a $2.3 million loss from discontinued
healthcare business in Lab Holdings' financial statements. During the
first six months of 1997, Response's revenues were $50 million and net
earnings totaled $2.1 million.
The combined effect of the above factors resulted in net earnings of $2.9
million or $0.45 basic earnings per share in the six month period ended
June 30, 1998 as compared to a net loss of $9.4 million or $1.46 basic loss
per share in the same period last year.
Publicly-Traded Subsidiary
Lab Holdings' majority-owned subsidiary, LabOne, is publicly-traded. At
June 30, 1998, based on the market prices of publicly-traded shares of this
subsidiary, pretax unrealized gains of approximately $129.2 million on this
investment were not reflected in either Lab Holdings' book value or
stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1998, at the holding company level, Lab Holdings had available
for operations approximately $5.1 million in cash and short-term
investments. Lab Holdings' working capital at June 30, 1998 decreased
slightly to $6.2 million from $6.3 million at December 31, 1997.
On a consolidated basis, Lab Holdings had $17.8 million in cash and short-
term investments at June 30, 1998. Current assets totaled approximately
$46.3 million while current liabilities totaled $8.6 million. Accounts
receivable increased $3.1 million or 24% from December 31, 1997 due to
LabOne's increase in revenues for the six month period.
Net cash provided by continuing operations totaled $4.1 million in 1998's
first six months compared with $33.7 million in 1997's first six months,
primarily reflecting net earnings in 1998, a net loss in 1997 and a $34
million net change in the trading portfolio in 1997. Additionally in 1997,
the discontinued healthcare business used $1 million and discontinued real
estate operations provided $581,000.
Net cash used by investing activities in 1998's first six months totaled
$6.3 million, as compared with $10.8 million in 1997's first six months.
The net cash used in 1998 primarily reflects LabOne's net additions to
property plant and equipment related to construction of a new facility.
Net cash used by investing activities in 1997's first six months included a
net increase in long-term investments of $3.6 million, $2.4 million of net
additions to property, plant and equipment supporting expanded laboratory
capacity and $4.1 million of intangible asset purchases by LabOne
associated with its purchase of the assets and customer list of GIB
Laboratories, Inc.
Net cash used by financing activities of $3.9 million in 1998's first six
months reflects Lab Holdings regular cash dividends to its shareholders.
Net cash used by financing activities in 1997's first six months totaled
$23.5 million primarily due to the $19.6 million cash transferred to SLH
and regular cash dividends of $3.9 million.
Lab Holdings is currently a holding company. Sources of cash are
investment income and subsidiary dividends. There are currently no
restrictions that would limit LabOne's ability to make future dividend
payments. The primary uses of cash for Lab Holdings are investments,
operating expenses and dividends to shareholders.
LabOne paid regular quarterly dividends in 1998 and 1997. As an 82% owner,
Lab Holdings received $3.8 million of cash as dividends from LabOne in
1998. LabOne's working capital position declined $3.9 million to $31.5
million at June 30, 1998 from $35.4 million at December 31, 1997. This
decrease is primarily due to capital additions and dividends paid exceeding
LabOne's cash provided by operations before changes in working capital.
LabOne's new facility project is expected to cost approximately $33 million
and will be financed with an industrial revenue bond (IRB) approved by the
City of Lenexa (Kansas). The IRB is expected to be in place during the
third quarter 1998. Interest on the bond will be based on a taxable seven
day variable rate. LabOne will sell $20 million of the $33 million IRB,
and $13 million will be purchased by LabOne. LabOne expects to repay the
bond over 11 years at $1.85 million per year plus interest. As of June 30,
1998, total capital expenditures for this project were $10 million.
LabOne had no short-term borrowings in the first six months of 1998.
LabOne expects to fund operations and future dividend payments from a
combination of cash flows from operations and cash reserves.
LabOne is actively addressing Year 2000 computer concerns. LabOne has
established an oversight committee which includes management from all parts
of LabOne that meets periodically to review progress. LabOne expects to
complete all internal Year 2000 objectives by the end of the first quarter,
1999 and is assessing the Year 2000 preparation and contingency plans of
its clients and vendors. Total expenses related to this project are not
expected to be material to LabOne. However, there can be no assurance that
LabOne's adjustments to its computer systems will completely eliminate all
Year 2000 problems. In addition, there can be no assurance that the
systems of Lab Holdings' and LabOne's clients and vendors will be converted
to address Year 2000 problems in a timely and effective manner or that such
conversions will be compatible with Lab Holdings' and LabOne's computer
systems. A failure to properly address the Year 2000 problem could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Lab Holdings has completed its Year 2000 internal compliance program and
believes that its limited computer systems are now Year 2000 compliant.
The SLH Corporation/Syntroleum Corporation merger was completed on August
7, 1998. Per the Facilities Sharing and Interim Services Agreement between
Lab Holdings, SLH and Syntroleum, the former employees of SLH are now
employees of Lab Holdings. Concurrently, SLH/Syntroleum is providing
facilities to Lab Holdings in exchange for certain limited accounting,
bookkeeping, tax and administrative services by Lab Holdings personnel.
RECENTLY ISSUED ACCOUNTING STANDARDS
No recently issued accounting standards presently exist which will require
adoption in future periods.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
(a) Changes in Securities: None
(b) Under the Missouri General Corporation Law, no dividends to
stockholders may be declared or paid at a time when the net assets of the
corporation are less than its stated capital or when the payment thereof
would reduce the net assets of the corporation below its stated capital.
At June 30, 1998, the net assets of Lab Holdings, Inc. exceeded its stated
capital by $48,151,000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
(a) The annual meeting of shareholders was held on May 14, 1998
for the purpose of electing a board of directors, approving the adoption of
the 1997 Directors' Stock Option Plan and approving the appointment of
auditors. Proxies for the meeting were solicited and there was no
solicitation in opposition to management's solicitations. Holders of
6,489,103 shares were eligible to vote and 5,270,200 shares were
represented at the meeting either in person or by proxy.
(b) Management's nominee for director as listed in the proxy
statement was elected with the following vote:
Director Shares Voted Shares Shares Not
For Withheld Voted
-------- ------------ -------- ----------
Steven K. Fitzwater 5,260,943 8,856 401
The shareholders approved the adoption of the Lab Holdings, Inc.
1997 Directors' Stock Option Plan by the following vote:
Shares Voted Shares Voted Shares Shares Not
For Against Abstaining Voted
------------ ------------ ---------- ----------
5,066,871 184,325 18,600 404
The shareholders approved the appointment of KPMG Peat Marwick LLP
as independent auditors for the year ending December 31, 1998 by the
following vote:
Shares Voted Shares Voted Shares Shares Not
For Against Abstaining Voted
------------ ------------ ---------- ----------
5,261,128 586 8,084 402
Item 5. Other Information
Stockholders who intend to present proposals for inclusion in the
Company's proxy statement for the 1999 annual meeting of shareholders, must
forward them to the Company at 5000 W. 95th Street, Suite 260, Shawnee
Mission, Kansas 66207, ATTENTION: Secretary, so that they are received
not later than December 20, 1998. In addition, proxies solicited by
management may confer discretionary authority to vote on matters which are
not included in the proxy statement but which are raised at the annual
meeting by shareholders, unless the Company receives written notice of the
matter on or before March 8, 1999, at the above address.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 1997 Long-Term Incentive Plan of LabOne, Inc.
(incorporated by reference to Exhibit 10.1 to the LabOne, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-15975).
10.2 Form of Stock Option Agreement pursuant to the LabOne
1997 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to
the LabOne, Inc. Quarterly Report on Form 10-Q for the quarter ended June
30, 1998, File No. 0-15975).
10.3 Lab Holdings, Inc. Facilities Sharing and Interim
Services Agreement, dated as of June 1, 1998 (incorporated by reference to
Exhibit 10.29 to the SLH Corporation Registration Statement on Form S-4,
Registration No. 333-50253).
27 Financial Data Schedule - as filed electronically by
the Registrant in conjunction with this Form 10-Q.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lab Holdings, Inc.
Date August 11, 1998 By /s/ Steven K. Fitzwater
----------------------------
Steven K. Fitzwater
Executive Vice President, Chief
Operating and Financial Officer
Date August 11, 1998 By /s/ Linda K. McCoy
----------------------------
Linda K. McCoy
Vice President and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the period ending June 30, 1998 and is qualified in its
entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,910
<SECURITIES> 1,876
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 1,629
<CURRENT-ASSETS> 46,251
<PP&E> 0<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 73,829
<CURRENT-LIABILITIES> 8,616
<BONDS> 0
0
0
<COMMON> 7,500
<OTHER-SE> 48,151
<TOTAL-LIABILITY-AND-EQUITY> 73,829
<SALES> 49,096
<TOTAL-REVENUES> 0
<CGS> 26,791
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,652
<INCOME-TAX> 2,911
<INCOME-CONTINUING> 2,908
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<CHANGES> 0
<NET-INCOME> 2,908
<EPS-PRIMARY> .45
<EPS-DILUTED> .44
<FN>
<F1>Disclosure not required on interim financial statements.
</FN>
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